The Key Elements of a Company's Annual Report
An annual report is intended to provide a snapshot of a business' performance with investors, potential investors and other stakeholders. It should provide enough information so that a potential investor understands the nature and scope of the business, its recent developments and future outlook. The main sections of an annual report typically include the financial statements and the "Management Discussion and Analysis." The former gives a summary of the financial results over the past year. For publicly traded companies, all financial results must be reported for public consumption. Privately held companies are under no such obligation, but most will share key financial information with investors.
The information contained in an annual report should give investors and other stakeholders a clear idea of how the company is performing and how it plans to grow and improve its business in coming years. Publicly traded companies mail reports to shareholders or provide a copy of the annual report on their websites. Investors who want the straight financial data can also download copies of the company's 10-K it files with the Securities & Exchange Commission. If you own a privately held business, you can provide copies of audited financial statements to investors.
It is customary for the annual report to contain a letter from the chairman of the board of directors to shareholders. A small business might not have a separate board of directors, but a letter from the chairman and CEO/president is appropriate to give to investors and other stakeholders and should provide an overview of the past year's key developments. The chairman's letter should provide details about the successes as well as the challenges of the past year. It should also include the future outlook for the company, including insights about the market and growth opportunities.
The Management Discussion and Analysis is a section of the annual report that discusses different aspects of the business. Topics of discussion typically include new hires or appointments, new product introductions, updates on the progress of business acquisitions, product launches and other information management believes to be important to investors. It is an overview of the previous year's developments and how the company performed over that period. It should be a good starting point for a new investor who wants to understand a business' fundamentals.
The financial statements comprise the meat of the annual report. This is where the company provides the numbers that investors use to determine how well the company performed financially. The financial statements consist of the income or profit and loss statement, balance sheet and cash flow statement for the previous year and prior years so investors can compare the performance from one year to the next. Publicly traded companies are required to provide three years worth of financial statements in their annual reports. A privately held company is not bound by the same regulations. However, investors will always welcome greater transparency. A privately held business that goes above and beyond to publish prior-year financial results in its annual report increases its chances of attracting new money.